Uttarakhand High Court Directs Facilitation Council Under MSMED Act To Educate Its Officers About Arbitration Law, To Avoid Flagrant Violation Of Arbitration Act

The court passed the said direction while hearing an appeal against the decision of the Commercial Court who had set aside the arbitral award passed by the Facilitation Council in the arbitration proceedings conducted under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

The bench comprising Chief Justice Vipin Sanghi and Justice Alok Kumar Verma observed that neither the Statement of claim was called for, nor the right to file a defence was given to the award debtor in the arbitral proceedings, as required under Section 23 of the Arbitration and Conciliation Act, 1996 (A&C Act).

The bench remarked that in view of Section 18(3) of the MSMED Act, the Facilitation Council was bound to undertake the arbitral proceedings in accordance with the A&C Act.

Upholding the decision of the Commercial Court, the court ruled that the arbitral award was passed in breach of Section 23 and Section 18 of the A&C Act, which provides for grant of equal and full opportunity to each party to present the case.

While holding that there was a flagrant violation of the A&C Act, the bench concluded that the award was in breach of the principles of natural justice and in conflict with the basic notion of justice, since the award debtor was not given the opportunity to present its case.

The appellant, M/s B.S. Polypack, is a micro enterprise, who undertook to supply certain goods to the respondent, M/s Uttaranchal Agro Food Ruler Mills. After a dispute arose between the parties with regard to the amount payable to the appellant, the latter invoked the remedy available to it under Section 18 of the MSMED Act.

Since the conciliation proceedings initiated by the Facilitation Council failed, the Facilitation Council commenced arbitration under Section 18(3) of the MSMED Act and passed an award in favour of the appellant.

The respondent, Uttaranchal Agro, challenged the award under Section 34 of the A&C Act before the Commercial Court, who set aside the award. Against this, the appellant, B.S. Polypack, filed an appeal before the High Court.

The High Court reckoned that after the parties had failed to reach a settlement, the Facilitation Council closed the conciliation proceedings and issue notice to the parties for “final hearing”. In the said notice, the Facilitation Council recorded that the conciliation proceedings had been closed and that arbitration had been commenced under Section 18(3) of the MSMED Act.

However, the bench observed that no date was fixed by the said notice, and neither of the parties were required to file their statement of claim / defence. Thereafter, the Facilitation Council proceeded to pass an arbitral award in favour of the appellant. In the Section 34 application filed by the respondent, the Commercial Court set aside the award on the ground that no statement of claim or defence was called by the Arbitral Tribunal, and consequently, there was a breach of Section 23 of the A&C Act.

The appellant, B.S. Polypack, however, argued before the court that ample opportunity had been granted to the respondent, Uttaranchal Agro, to place its defence during the conciliation proceedings.

Perusing the facts of the case, the court observed, “A perusal of the proceedings recorded by the Facilitation Council on 04.11.2019 show that the respondent had appeared before the Council during the stage of conciliation, and put forth its stand, to the effect, that the appellant had been over paid, and Rs.2,43,830/- was recoverable from the appellant. In that regard the respondent had also produced a written document. The appellant had, however, denied having received any amount in cash, or executing the said document.”

The court said that in view of Section 18(3) of the MSMED Act, the Facilitation Council was bound to undertake the arbitral proceedings in accordance with the A&C Act.

“From a reading of sub-section (3) of Section 18, it is seen that, once the dispute is referred for arbitration to be conducted by the Council itself, or by any other institution or centre by the Council - “the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in subsection (1) of Section 7 of that Act,” said the court.

The bench added: “The Parliament has consciously used the words “shall then apply to the dispute”, and the words “as if the arbitration was in pursuance of an arbitration agreement referred to in subsection (1) of Section 7 of that Act” (meaning the Arbitration and Conciliation Act), making it abundantly clear that the arbitration which is conducted – whether by the Council, or by any other institution or centre, has to be in compliance with the provisions of the Arbitration and Conciliation Act.”

The court thus concluded that the notice issued by the Facilitation Council, and its decision to fix the matter for ‘final hearing’, was illegal and flawed. Perusing the arbitral award, the court noted that neither the statement of claim was called for, nor the right to file a defence was given to the respondent. Further, the primary issue – as to whether any payment was due to the appellant, and if so, what amount the appellant was entitled to, was not framed by the Council.

The bench further observed “There is absolutely no discussion in the impugned Award with regard to the stand taken by the respondent during the course of conciliation, that it had over paid the appellant, and amounts were recoverable from the appellant to the tune of Rs. 2,43,830/-. The document produced by the respondent during the course of conciliation in support of its aforesaid plea has been completely ignored while passing the impugned Award. There is no reason disclosed in the Award – as to why the document produced by the respondent has been rejected.”

The court thus concluded that the arbitral award was passed in breach of Sections 18 and 23 of the A&C Act, in breach of the principles of natural justice, and in conflict with the basic notion of justice.

While dismissing the appeal, the court further remarked, “It pains us to see that the MSME Council has conducted the arbitral proceedings completely unmindful of its obligations - cast under the Arbitration and Conciliation Act. We direct the MSME Council to organize workshops and seminars to educate its officers, who undertake arbitration proceedings, to equip themselves with the law of Arbitration, so that such flagrant violations of the Arbitration and Conciliation Act do not reoccur.”

Case Title: M/s B.S. Polypack vs M/s Uttaranchal Agro Food Ruler Mills & Anr.

Dated: 05.04.2023

Counsel for the Appellant: Mr. Shobhit Saharia

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